States Deal with Budget ‘Structural Imbalance’

By Mikel Chavers, CSG Associate Editor

States are dealing with declining tax revenues, according to the National Association of State Budget Officers. And because of that, many are faced with huge budget shortfalls and painful cost-cutting measures.

But those could be just symptoms to a larger problem—experts say there’s a structural imbalance in state government today: States are spending more money than they are bringing in.

For some, that’s starting to catch up to them.

“You’ve got a structural imbalance of having way more needs and wants in terms of expenditures, but in terms of revenue, it won’t meet that amount,” said Scott Pattison, executive director of the National Association of State Budget Officers, a Washington, D.C.-based association.

“Managing that situation is going to be difficult for states,” Pattison said.

In fact, according to Pattison’s organization, the latest numbers show a majority of states are dealing with declining revenues. But the bills never stop.

Colorado is dealing with a budget gap of at least $1.5 billion, according to the Denver Business Journal. And the gap is primarily due to falling revenues. Sales and income tax collections fell 22 percent in March from March 2008, the Denver Business Journal reports, leaving the state more than $57 million short on revenue. Corporate income tax revenues were off projections by more than $24 million, individual income taxes declined by $32.2 million and sales taxes were $2.9 million less than projections, according to the Denver Business Journal.

Louisiana is dealing with a budget shortfall of $1.3 billion, according to the Daily Comet in Thibodaux, La.

Those deficits will call for drastic measures.

In fact, the National Association of State Budget Officers and the National Governors Association are predicting in their April issue of State Economic Review that more states will enact tax and fee increases rather than decreases for 2010 fiscal year budgets. Twenty states decreased taxes and fees in the 2009 fiscal year and adopted only 14 increases, but that was in spring 2008—before the financial markets collapsed in the fall, according to the April State Economic Review.

To deal with all this, several states are considering tax and fee increases, as well as budget cuts, and are tapping into rainy day funds, according to State Economic Review.

“It’s a very severe economic downturn and as a result the revenue has declined pretty precipitously, with very little exceptions,” Pattison said.

Colorado, for example, is in dire straits financially and is one of the states experiencing what Pattison calls the “structural imbalance.”

When it came to trimming Colorado’s budget to meet the more than $1 billion shortfall, according to the Associated Press, legislators originally wanted to cut $300 million from higher education and take $500 million from the state’s workers’ compensation fund.

But Colorado Gov. Bill Ritter said he did not support the plan, according to the AP.

Instead, Colorado’s legislature passed a new version of budget bill and sent it to the governor April 24. The new version doesn’t make $300 million in cuts to higher education or drain the state’s workers’ comp fund.

Joint Budget Committee member Rep. Mike Ferrandion said in a statement, “We made deep cuts, and unfortunately, it will impact a wide range of government services. … We have cut back, but we refuse to balance the budget on the backs of children, the disabled, the elderly, students and working families.”

So why not just raise taxes to make up for declining revenues? (Even if just is a bit of an understatement.) After all, the National Association of State Budget Officers and the National Governors Association are predicting that as states continue to feel the fallout from the down economy, the likelihood that states will raise taxes grows.

But in Colorado, there’s a Taxpayer’s Bill of Rights, which means any tax increase that meets certain growth parameters must go to a referendum to be voted on by the state’s residents. The Taxpayer Bill of Rights was an amendment to the Colorado Constitution.

In Louisiana, the financial situation is also getting bad. But there are ways the state can plug the budget hole: Louisiana can take funds out of the rainy day fund (the Budget Stabilization Fund) or it can raid a $775 million fund set aside for drawing large-scale economic development projects to the state.

If the state taps its already maxed-out rainy day fund—which is at its limit because of oil and gas receipts in recent boom years—it will have to replenish later, according to the Daily Comet. What’s more, only one-third of the fund can be withdrawn in a two-year period, the newspaper reports. So if legislators get the two-thirds vote to tap it this year, they may not be able to touch it again for two years.

And declining tax revenues, like the situations in Colorado and Louisiana, make for a “frustrating situation,” Pattison said. That’s because the economy is still in bad shape, he said.

“Unfortunately, the way you deal with that is you have to continue to cut or use up your rainy day funds,” Pattison said.

Now, what state governments provide and pay for just might change, he said. “There’s only going to be so much money,” he said. “There’s so much money needed for just prisons, corrections and Medicaid and schools—it’s really hard for us to do more than that.”

And with limited money available, “it is going to force some policy change based on cost,” Pattison said.

Check out the June/July issue of State News magazine for a look at how states are dealing with the imbalance between declining revenues and expenditures. State News magazine is available online at statenews.csg.org.